Saturday, January 26, 2013

Celgene, based in Summit, New Jersey, is a biotechnology and pharmaceutical company best known for its Revlimid therapy for multiple myeloma (MM). At its analyst call to discuss fourth quarter 2012 results, CEO Robert Hugin projected that revenue would hit $6 billion in 2013 and grow to $12 billion by 2017. He believed profits (non-GAAP EPS, earnings per share) would grow even faster, at an average of 25% per year through 2017.

Last night I heard a high-level twit on NPR's Marketplace say that he would not buy stocks at this level because they have gone up so much in the last year, and in over the years since the 2008 collapse. Would he say the same about Celgene in particular?

Celgene's stock price took a hit during and following the 2008 selloff, reaching a low of $38.33 in 2009. Here are end-of year closing prices since then:

2009: $55.68
2010: $59.43
2011: $67.60
2012: $78.47

A naive investor might think that after a run up over four years buying at $78.47 would be a very risky thing to do. But in less than a month Celgene jumped to Friday's closing price of $99.76.

This is not idle speculation. Celgene stock has risen because revenue and profits have risen. It will rise further if revenue and profits continue to rise. So the question an investor should be asking is not what the price history is, but what reasonable projections can be made about profits.

The rise of Celgene to a top-level company has been driven largely by Revlimid sales, which accounted for $1.0 billion in revenue in the fourth quarter, or 70% of overall revenue of $1.42 billion. That might indicate a risky concentration in a single drug. Drugs typically pick up competitors over time, and eventually go generic. Should we discount the value of profits coming from Revlimid?

Revlimid's original approval was not for MM, but for MDS, myelodsplastic syndromes, and it is still used for that indication. Revlimid received FDA approval for MM in 2006, so it is a relatively new drug. Revlimid revenue is projected to continue to mount for three reasons. Revlimid has not yet fully penetrated the global market for its current label, which is for second line therapy, in other words for "patients who have received at least one prior therapy." There are still nations in the process of approving the therapy, of approving reimbursement, or of ramping commercially. A bigger factor is clinical trial data suggesting that Revlimid should have its label expanded to include first line therapy, which would give it a bigger share of the MM market. The length of therapy has been increasing and should bet a good bump from the shift to first line. Longer therapy means more revenue per patient.

Yet most of the projected expansion of Celgene revenue does not come from Revlimid. Revenue in Q4 from Vidaza was $216 million; from Abraxane was $106 million; and from Thalomid was $73 million. Except for Thalomid, all these therapies should see revenue growth. Abraxane, in particular, has clinical data showing it is effective for two hard-to-treat cancers, pancreatic and melanoma, in addition to its current label for breast cancer and its recent FDA approval for non-small cell lung cancer. FDA approvals are likely some time in 2013.

Apremilast for psoriasis and psoriatic arthritis, ankylosing spondylitis, and rheumatoid arthritis will likely be a blockbuster, with good clinical data in psoriatic arthritis likely leading to FDA approval this year. and Istodax has already received FDA approval and will generate revenue in 2013. Pomalidomide is in a Phase III trial for myelofibrosis and reported good results for MM. The FDA should complete its review by February 10, 2013.

Of course, the future could hold twists we cannot foresee. Celgene's Hugin is not guaranteeing a certain level of profit for 2017, or any particular stock price.

I find Celgene's 2017 revenue and earnings guidance quite credible. Given that, the price per share in 2017 should be in the $200 to $230 dollar range, given a typical stock market with typical price-to-earnings ratios. Also assuming that in 2017 it looks like there is more growth ahead.

Celgene is in the Nasdaq 100 and S&P 500, so several index funds include it. It is in most biotechnology funds as well, for instance the Nasdaq Biotechnology Index (IBB).

Remember, no matter how good you think a single company's future look, diversified portfolios can provide much more safety while retaining a high degree of potential growth. Keep diversified!

Wednesday, January 23, 2013

AMD hit revenue guidance for the final quarter of 2012, but the numbers were still dismal. Revenue was $1.16 billion, down 9% sequentially from $1.27 billion, and down 32% from $1.69 in the year-earlier quarter. Guidance is for Q1 2013 revenue to be down around another 9%. Net income was $473 million in the red on a GAAP basis, and even on a non-GAAP basis was $102 million short of break-even.

Despite that AMD CEO Rory Read were surprisingly upbeat about 2013, predicting the a return to profitability in the second half. Of course we've heard that kind of optimism from AMD before, only to be let down. Are AMD's claims of a turn-around ahead credible?

AMD is currently known for making CPUs that compete with Intel's for personal computers (notebooks and desktops) and servers. In addition AMD makes stand alone graphics chips (GPUs), competing mainly with NVIDIA. AMD has not done well in the server space these last five years, and the PC space has started to shrink, in part because tablets and smartphones have become more popular and mostly use ARM based CPUs, rather than the more capable and power-hungry x86 coded chips made by AMD and Intel.

In 2012, in an effort led by the remarkable vice president of global business units Lisa Su, AMD started to re-target its intellectual property development towards growth sectors. The acquisition of SeaMicro acted as an entry to the dense server space, where AMD's graphics expertise could eventually help with highly-parallel computations, and Opteron technology is a better fit than Intel's server chip designs. In addition, AMD has announced it will use ARM technology when appropriate in this field. Although the complete new system will not be available for some time, Rory reported that Q4 SeaMicro revenue grew.

A second major line of attack is embedded SoC chips. This is a bit of a vague term; as used by AMD, it seems to amount to the non-PC sector. SoC, System on Chip, typically means that the chip is not a stand-alone CPU. In reality, even what we now call CPUs are not stand-alone CPUs: AMD has been a leader in moving critical components that "glue" the CPU to the rest of the system, like memory controllers, onto a single chip. Embedded SoC in this case means customized for a particular application. Rory indicated AMD would be looking only at relatively high-volume applications as margins have been too low in some low-volume systems. Examples of possible embedded AMD chip use would be for advertising displays, casino machines, industrial and medical use.

AMD does not currently break out embedded revenue, but the goal is to raise it to 20% of revenue by the end of the year. No word on whether that is 20% extra revenue or 20% replacement of eroding PC revenue, and Rory made it clear no details would be announced until the OEMs are ready to announce them.

The PC business, of course, is still critical, as is the entry into tablet computing. Rory made a point that AMD engineers are executing well, making their timeline, and in one crucial area are about 6 months ahead of Intel. Along those lines, AMD has demonstrated working Temash and Kabini silicon. These APUs will be quad core SoCs for the tablet and mobile markets. They also already introduced the new Richland A series APU, upgrading a sweet spot in their line.

This morning as I write AMD has popped from its pre-conference and results close of $2.45 up 9% to $2.67. Obviously no one knows if AMD will be able to execute its plan or if, once products are available, they will sell well enough to bring AMD back to profitability. It has the look and feel of a good plan and a big turnaround to me, but I have been wrong about AMD in the past, and the sands of silicon are shifting rapidly and unpredictably. Before getting bullish on AMD, I'd like to see the 2013 products, the revenue, and the profits.

Disclaimer: I have long been long AMD and will not trade the stock for 3 days after the publication of this report.

Friday, January 18, 2013

TTM Technologies (TTMI), the largest American manufacturer of printed circuit boards (PCBs), saw a sharp drop in its stock price to $7.37 on Tuesday, January 15 after a story of a downgrade from an analyst at Stifel Nicolaus was circulated.

The company responded by updating its fourth quarter 2012 guidance on Thursday, coinciding with a presentation to investors that had already been scheduled. These results were equal to or better than the guidance TTMI gave when reporting Q3 (See TTMI Q3 2012) . The stock had recovered to $7.98 by market close today.

Q4 revenues are expected to be between $360 and $380 million, with GAAP earnings of $0.07 to $0.14 and non-GAAP earnings of $0.14 to $0.21.

In addition CEO Kenton Alder told investors that the high rate of capital expenditures of 2011 and 2012, which was required to meet high demand for the most advanced technology PCBs, would trend downward in 2013, from about $120 million to closer to $100 million. That will free up cash flow for other uses.

In Q3 2012 TTM's largest customers had been : Apple, Cisco, Ericsson, Huawei, and IBM, which together accounted for 31% of total sales. The largest customer, Apple, accounted for 14% of sales.

There has been much talk of a slowdown in demand for Apple products, which may have caused some analysts to assume TTMI would have a poor quarter, or poor growth in 2013. Mr. Alder pointed out that Apple is a relatively new customer for TTMI, and as such the PCBs made for Apple are for the iPad, not the iPhone. He said there had been no decrease of orders so far for iPad PCBs. He explained that as the newest PCB supplier to Apple, with the newest technology available, TTMI is gaining share from other suppliers of PCBs for Apple.

He also said TTMI makes the PCB for the Amazon Kindle Fire. Because it is a global company with a broad array of customers, TTMI is not particularly vulnerable to reduced demand from any particular client.

He also said that networking sector orders picked up in the quarter, but he was not yet ready to say this was a trend.

According to NASDAQ, of institutional (sell-side) analysts covering TTMI, 2 rate it as a Strong Buy, 1 as a Buy, and 4 as a hold.

Disclaimer: I own TTMI and will not trade the stock for 3 days after the publication of this report.

Based in Fremont, California, SGI manufactures supercomputers that are used in science research, Internet-based businesses, security, and other computation-intensive businesses. Revenues for the quarter were near $171 million, well below guidance of $180 to $195 million. CEO Jorge Titinger attributed the shortfall to three large deals with government agencies that normally would have closed in the quarter. In total the deals represented $15 million in revenue, and two of the three have closed since the quarter ended. The delays were due to agency concerns about their budgets due to the fiscal cliff standoff.

Despite the revenue shortfall, profits came in above prior guidance. This was due to better management, including closer attention to profit margins on individual supercomputer sales. On a GAAP basis net income is expected to be between break even and $1 million, or zero to $0.03 per share. On a non-GAAP basis net income is between $3 million and $4 million, for $0.07 to $0.10 earnings per share (EPS).

SGI ended the quarter with $128 million in cash, up $17 million in the quarter. Titinger and the new management team have started requiring deposits and milestone payments on the more expensive supercomputer systems, resulting in better cash flow.

It a presentation to investors, Titinger emphasized SGI's expertise in Big Data and Scale-Up Computing, as well as innovative storage solutions for massive amounts of data that need to be available for analysis. He talked about how SGI computers can do complex security checks for credit cards in real time (as they happen), something that used to take days to do.

As a sweetener SGI will used $15 million of its cash to buy back shares.

SGI stock ended the day at $10.87, up $0.34 for the day or 3.2%. That gave SGI a market capitalization of $360 million.

Disclaimer: I own SGI stock and will not trade the stock for 3 days after the publication of this report.

Tuesday, January 8, 2013

After finally getting FDA approval for prostate cancer therapy Provenge in May 2010, Dendreon's management thought their main problem would be setting up enough manufacturing capability to meet patient demand. Instead, and largely due to the FDA's unconscionable approval delay, by the time Provenge was available prostate cancer competing therapies were coming to market, from companies with larger and more experienced sales forces.

So revenue did not ramp as fast as Dendreon expected. Worse, they leveled off this year. Here are the numbers:

Provenge revenues, millions

2011

2012

Q1

$28.1

$82.0

Q2

$49.6

$80.0

Q3

$65.8

$78.0

Q4

$77.0

$81.6

The Q4 2012 Provenge revenue is preliminary, and excludes a $3.8 million favorable adjustment to chargeback reserves which had built up in prior quarters.

Provenge seems to be in a run rate of $320 million per year, which would be a pretty successful drug if its cost of production were more normal and if it was one of many therapies of a corporation. But at $320 million per year it makes Dendreon a money loser.

The Q4 $81.6 million is suggestive of a trend. Provenge therapy is a bit complicated, so a quarter with major holidays like Q4 might be expected to show some seasonal decline. Q4 2012 is improved $4.6 million or 6% over Q4 2011. It is also up sequentially $3.6 million, or 5%.

On the other hand, the peak so far is back in Q1 of 2012. Also, a number of factors might make revenue slop in or out of a particular quarter.

Even as we await the analyst conference and official numbers for Q4, our minds move to Q1 2013. I would put the goal post at $85.0 million for calling a trend. That would give us 4% annual growth and a record quarter. Even 2 up-trending quarters is not enough to go out on a limb on, but it might start to restore confidence in the financial future of Dendreon.

Disclaimer: I am long DNDN and will not trade the stock for 3 days after the publication of this report.

Monday, January 7, 2013

Many, but not all, analysts had a dim view of Onyx Pharmaceuticals (ONXX) at the beginning of 2012. Onyx had only one approved therapy, Nexavar for liver and kidney cancer. Between sharing Nexavar revenues with marketing partner Bayer and heavy R&D spending on new drugs and indications, Onyx ended in the red in most quarters.

What a difference a year makes. Onyx now had 4 approved indications and data that should earn approval for 2 more. A deeper pipeline exists as well. Its newly approved drug Kyprolis for MM (multiple myeloma) had revenues of $62 million, most of which would have been in the fourth quarter. This does not necessarily mean that Onyx will show a profit for Q4, but it does look like 2013 will be remarkably good, with 2014 even better.

The third approved therapy, and fourth approved indication, is Stivarga (formerly Regorafenib), which was also developed in conjunction with Bayer. Bayer will do the selling and Onyx will receive a 20% royalty, which will be cash that goes straight to the bottom line. Stivarga was approved in September 2012 for colorectal cancer patients who have been previously treated with currently available therapies. Royalties should ramp in 2013.

The fifth indication is Nexavar for iodine-refractory differentiated thyroid cancer. Again, Bayer will do the sales and share revenue with Onyx. The Phase III trial results are still to be submitted to the FDA, but approval is likely and revenue could commence in late 2013 or early 2014.

Sixth we have Stivarga for GIST, gastrointestinal stromal tumors.

So in 2013 we have a mid-sized biotechnology company with high expectations of multiple revenue ramps which should continue into 2014 and beyond.

Early in 2012 you could have bought ONXX at its 52-week low of $35.73. As I write the price is $81.41, or 128% above that. It already hit a 52 week high of $93.18.

I see Onyx as a company that will demonstrate its ability to generate revenue and profits during 2013 and 2014, but it is important to keep in mind how lengthy global cancer ramps can be. There is the whole rest of the world and even today Nexavar is still expanding into new nations for liver and kidney cancer, several years after introduction. Cancer approvals often start in second-line or later settings. Revenues can ramp significantly if the drugs can will approvals for administering to new, first-line patients.

Also, there has to be a lot of unrealized value in the management team. There are a lot of therapies out there to buy the rights to develop. Most drugs fails somewhere between Phase I trials and FDA approval. Onyx management, led by Anthony Coles, M.D., has done a remarkable job picking therapies and targets for development. It might be just luck, but it likely means they will do well with their earlier-stage pipeline and any future rights they acquire.

Onyx still has a very high P/E ratio, but that should drift down as profits ramp in 2013.

It looks to me like Onyx Pharmaceuticals is a stock to buy and hold for at least the remainder of this decade. If you can think that long-term.

Disclaimer: I am long ONXX and will not trade the stock for 3 days after the publication of this report.